Yahoo reports better than expected profit but ad business still struggling

SUNNYVALE -- Yahoo's (YHOO) stock has been on a tear in recent months, but the company's latest earnings report Tuesday showed that its core advertising business is still struggling in the face of competition from online rivals including Google (GOOG), Facebook and even the upstart Twitter.

The pioneering Internet company reported earnings that were slightly better than Wall Street expected, but its revenue and profit were down from a year ago, when Yahoo benefited by selling some of its shares in the Chinese e-commerce company Alibaba.

And despite some tantalizing numbers that show more people are visiting Yahoo sites on the Web and on mobile devices, the company again lowered its revenue forecast for the year.

Most analysts were expecting a tepid report from Yahoo, which has been struggling to revive its sluggish online ad business for several years. Since she was hired last summer, CEO Marissa Mayer has revamped Yahoo's most popular websites and introduced new mobile services, while promising investors that improving those free products would draw more users and in turn attract more advertising dollars.

Advertisement

But Yahoo's display and search-related ad sales continue to slip, at a time when overall spending on digital ads in the United States rose 13 percent in the third quarter, according to the research firm eMarketer.

All told, Yahoo reported net income of just under $300 million for the quarter that ended Sept. 30, on slightly more than $1.1 billion in revenue, or $1.08 billion after subtracting payments to ad partners. Earnings per share amounted to 28 cents a share, or 34 cents after excluding onetime charges. Analysts were expecting earnings of 33 cents excluding those charges.

Mayer boasted on a conference call Tuesday that Yahoo has reversed recent declines in website traffic and returned to levels it enjoyed two years ago.

"It will take some time for our increased engagement to translate into revenue," she acknowledged, but added that she is convinced the company is on "the right track."

Analysts have been skeptical. Yahoo's display ad business remains "challenged," according to a report by Carlos Kirjner, an investment analyst with Bernstein Research. He added that "the path from increased engagement to revenue growth and (even harder) to stable market share remains unclear to us."

Mayer also noted that the number of monthly active users of Yahoo websites has grown 20 percent over the past year, to 800 million, with nearly half of that representing users of Yahoo's mobile apps. But the company declined to give a specific breakout of mobile revenue.

Yahoo has made changes in its ad business, including new ad formats that are visually similar to the news updates that appear on its sites, and new automated auction programs for advertisers to buy space on Yahoo sites. Similar programs have worked well for Google and Facebook.

Despite Yahoo's struggles, the company's stock has been on a tear -- more than doubling over the past year and reaching its highest levels in almost eight years. It closed Monday at $33.38.

But analysts say that's largely because investors are excited about the impending public stock offering by Alibaba, the Chinese e-commerce company, in which Yahoo owns a 24 percent stake. That stake could be worth more than $19 billion to Yahoo in coming months.

Contact Brandon Bailey at 408-920-5022; follow him at Twitter.com/BrandonBailey.